Adding Intuitive Surgical To My Long-Term 50 Best Portfolio

Today, January 30, I added Intuitive Surgical (ISRG), one of my 10 Best Buys for After the Bear and an artificial intelligence pick from my Next 3 Big Things Special Report (both running on my subscription JubakAM.com site), to my long-term 50 Stocks Portfolio.

The company recently reported fourth quarter earnings of $3.13 a share, excluding the 16 cents a share cost of its Intuitive Foundation. The Wall Street consensus called for earnings of $3.07 a share. Revenue rose 17.3% year over year to $1.05 billion, which matched the Wall Street consensus. Global da Vinci surgical procedures rose by 19% from the fourth quarter of 2017. The company shipped 290 of its de Vinci robotic surgery systems, up from 216 systems in the fourth quarter of 2017.

Guidance, however, for 2019 was a bit disappointing with the company projecting 13% to 17% growth in da Vinci procedures versus 18% growth for the full 2018 year. (On the plus side the company forecast gross margins for 70% to 71% in 2019.)

The slight disappointment on guidance was enough to take the stock down to support at $495. (Today, January 28, the stock fell to $495.72, testing this support again.) Which gives me the opening to add Intuitive Surgical to my long-term 50 Stocks Portfolio.

The company is exactly the kind of long-term competitive advantage story that I look for in this portfolio. In a recent report consulting and accounting giant Accenture flagged healthcare as the biggest market for artificial intelligence and then picked robot-assisted surgery as the most promising growth opportunity in healthcare for artificial intelligence. Accenture pegged the value of that market at $40 billion by 2026. (“Value” as Accenture uses the term is the potential benefit from the specific application applied to the healthcare sector. It isn’t equivalent to market size. Number 2 in Accenture’s study is virtual nursing assistants at $20 billion in value.) Intuitive Surgical is the front runner in robot-assisted surgery with an installed base of about 4,000 of its da Vinci systems and a vast database mapping surgical procedures. Because of its market position, Intuitive Surgical has an adjusted operating margin in the mid-30%s. Gross margins for its systems are comparable to those it earns on consumable components. (The upgrade cycle of one of its da Vinci machines is five to eight years. But hospitals and clinics need to purchase new instruments after each procedure.) About 75% of the company’s business comes from the United States–which is both a problem (concentrated market risk) and an opportunity (expansion into new markets.)

The shares aren’t cheap at a trailing twelve month price to earnings ratio of 52, but the stock has bounced well in recent rally days. And the consensus Wall Street target price for these shares is $580. (I see resistance near $570 to $575.)

PS. I’m in the process of my annual rebalancing of all my portfolios. That effort should be completed–with 2018 performance reports–in the first weeks of February.